1 1 March 2000 CALIFORNIA OVERTIME EXEMPTIONS AFTER AB 60 Lynn K. Thompson Bryan Cave LLP 120 Broadway, Suite 300 Santa Monica, California (310)
2 TABLE OF CONTENTS Page I. The Framework for Overtime Regulation in California A. A Brief Summary of AB B. The IWC s Implementation of AB II. The Effect of AB 60 on the Major Overtime Exemptions A. The White Collar Exemptions Salary Requirement Minimum Salary Level Primarily Engaged in Duties that Meet the Test of the Exemption Proposal to Clarify the Duties Test for the Executive Exemption B. The Outside Sales Exemption C. Other Widely Available Overtime Exemptions Commissioned Employees Unionized Employees D. Possible New Exemptions Computer Professionals \ 2. Highly Compensated Employees Earning Incentive Compensation III. Conclusion Appendices: Executive Exemption Checklist Administrative Exemption Checklist Professional Exemption Checklist for Wage Orders 1, 4, 5, 9, 10 Only Professional Exemp
3 Outside Sales Exemption ChecklistCALIFORNIA OVERTIME EXEMPTIONS AFTER AB 60 In 1999, Governor Gray Davis signed legislation restoring California s daily overtime premiums that had been eliminated in 1997 by action of the Industrial Welfare Commission ( IWC ) during the administration of Governor Pete Wilson. In order to guard against similar actions during future administrations, AB 60 codified California s overtime requirements and related provisions into the Labor Code. At the same time, AB 60 invested the IWC with broad authority to regulate within the framework of the statutory provisions. AB 60 set into motion a flurry of regulatory activity that will have significant consequences for all employers operating in California. This paper focuses on the effect of AB 60 on the major overtime exemptions recognized in California. It will describe how AB 60 has modified the tests used to determine the exemptions for white collar employees, outside salespersons, and employees covered by collective bargaining agreements. It will also describe proposals currently under consideration by the IWC to clarify the tests for the exemptions and to establish new exemptions not previously recognized in California. The proper classification of employees as exempt or non-exempt often has proven problematic for employers. The regulatory framework in California is particularly confusing. Employers must comply with both the federal wage hour law (the Fair Labor Standards Act ( FLSA )) and California laws requiring payment of overtime. Historically California laws have been more stringent and accordingly, employers operating in California must pay careful attention to California laws and regulatory interpretations when designing and administering overtime and related pay practices. Federal and California laws contain various complete and partial overtime pay exemptions. Some exemptions that are recognized for purposes of the FLSA s overtime requirements have no counterpart exemptions under California law./ To the extent that federal and state law recognize similar exemptions (such as the white collar exemptions and the outside sales exemption), the regulatory tests to qualify for an exemption are significantly different. As a result, employers with operations in multiple states often find that employees in California are entitled to overtime pay although employees performing identical functions in other states are not. The consequences for employers of misclassifying employees can be high. AB 60 imposes civil penalties, in addition to back pay, to up to $ per employee for each pay period the employee is underpaid. Recently trial lawyers have identified wage/hour claims as a profitable endeavor. A wave of class action lawsuits have been filed in California charging failure to pay overtime. Many of these suits have targeted large employers employing hundreds of employees in manager and assistant manager classifications. Retail businesses have been hit particularly hard. Class certifications have
4 occurred in at least a dozen such cases in the last two years. Seven figure settlements have been reported in several cases. I. The Framework for Overtime Regulation in California. AB 60 codified California s overtime requirements into Sections of the California Labor Code. In so doing, AB 60 changed both the substantive requirements and the source of overtime regulation in California. Formerly, except in connection with public works projects, no California statute required private employers to pay overtime. Rather, overtime requirements were established by the Industrial Welfare Commission ( IWC ) as one aspect of its regulation of labor standards in California. The IWC is a five member body appointed by the Governor with consent of the Senate. Members serve four year terms. Labor Code 70. It regulates primarily through the issuance of Wage Orders which set minimum standards governing wages, hours and working conditions in specified industries and occupations./ There are presently 15 Wage Orders./ Within the framework of AB 60 s statutory requirements, the IWC has retained an important regulatory role, particularly with respect to the establishment of overtime exemptions. A. A Brief Summary of AB 60. Following is a summary of the provisions of AB 60 relating to overtime requirements and exemptions from overtime./ _ Overtime Premiums. Non-exempt employees are entitled to receive one and one-half times their regular rate of pay after eight daily hours of work, 40 weekly hours of work, and for the first eight hours worked on the seventh consecutive day of the same work week; and at the rate of twice the regular rate of pay after 12 hours of daily work and after eight hours worked on the seventh day of work in the work week. Labor Code 510. _ Make Up Time. An employee can request, with the employer s consent, to take time off and make up the lost day on other days in the same work week without overtime for the extra time. Make up time cannot result in more than 11 hours of work in one day or 40 hours in the work week without overtime compensation. Employers are prohibited from soliciting or encouraging employees to use make up time, and the employee s request for make up time must be documented in writing before the make up time is worked. Labor Code 513. _ White Collar Exemptions. The IWC is authorized to establish overtime exemptions for executive, administrative and professional employees (the so-called white collar exemptions) provided that the employee is primarily engaged in duties which meet the test of the exemption and the employee earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Primarily is defined to mean more than one half of the employee s work time. Labor Code 515(a) and (e.) (The white collar exemptions are discussed in detail below.)
5 _ IWC to Review Exempt Duties Tests. The IWC is instructed to conduct a review of the duties which will qualify employees for a white collar exemption. The IWC may adopt or modify regulations pertaining to the duties tests by July 1, Labor Code 515(a). (The IWC s activities in this regard are discussed below.) Unionized Employee Exemption. The daily overtime, alternative schedule and related provisions do not apply to employees covered by a valid collective bargaining agreement if it includes premium wages rates for all overtime hours worked, and a regularly hourly rate of not less than 30% more than the state minimum wage. Labor Code 514, 554. _ Registered Nurses and Pharmacists Are Not Exempt Professionals. The IWC is prohibited from exempting registered nurses employed to engage in the practice of nursing, or pharmacists employed to engage in the practice of pharmacy under the professional exemption. Such employees may qualify for an exemption if they individually meet the criteria for exemptions established for executive and administrative employees. Labor Code 515(f), 1186/. _ Alternative Schedules. Alternative schedules providing for a maximum of ten hours per day within a 40 hour week without overtime can be established if 2/3 of the affected employees in a work unit approve the schedule in a secret ballot election under procedures to be determined by the IWC. The alternative schedule must involve a regular schedule (as opposed to a flexible schedule). The schedule may be a single work schedule for all employees in the work unit or a memo of options from which each employee would be entitled to choose. Overtime at the rate of time and one-half must be paid after 10 hours in a day, and for the first 8 hours of work on days other than the regularly scheduled workdays established by the alternative work week agreement. Double time must be paid after 12 hours in a workday and after 8 hours worked on days other than regularly scheduled workdays established by the alternative work week agreement./ The results of any election must be reported to the Division of Labor Research and Statistics within 30 days of any election. Pending further study by the IWC, the procedures for the establishment of an alternative schedule that existed under Wage Orders 1, 4, 5, 7, and 9 prior to 1998 will govern. These procedures include the requirement for duly noticed meetings with employees, written disclosure of the impact of the alternative schedule on wages, hours and benefits, a secret ballot vote, and accommodation obligations with respect to employees who participated in a secret ballot vote to establish an alternative schedule but who cannot work it. Labor Code 515(a) and (b). Effects on Existing Alternative Schedules: Alternative schedules that were adopted after 1998 (without secret ballot votes) are null and void as of January 1, A limited grandfather provision permits an
6 employee who, as of July 1, 1999, was voluntarily working an alternative schedule providing for a regular schedule of not more than 10 hours per day, to continue working that schedule without daily overtime if the employer approves a written request of the employee to work the schedule. Limited grandfather provisions also apply with respect to alternative schedules previously implemented pursuant to the procedures in effect under the pre-1997 Wage orders. Labor Code 515(f) and (h). Special Provisions for Health Care Industry. Alternative schedules adopted by secret ballot vote under the provisions of Wage Orders 4 and 5 in effect prior to 1998 that provided for 12 hour shifts without overtime can be maintained until July 1, 2000, subject to further action by the IWC. The IWC is instructed to conduct a review of conditions in the industry and adopt new regulations not later than July 1, Labor Code 515(g). No alteration of Regular Rate. Employers are prohibited from reducing an employee s regular rate as a result of the adoption, repeal or nullification of an alternative work schedule. Labor Code 515(c). _ IWC Authorized to Establish, Retain and Eliminate Exemptions from Overtime. The IWC is authorized to review, retain or eliminate any exemption contained in any valid Wage Order in effect prior to January 1, Labor Code 515(b)(2). The IWC is further authorized to establish additional exemptions not inconsistent with the Labor Code where it finds that the hours or conditions of labor may be prejudicial to the health or welfare of employees in any occupation, trade or industry. This authority expires on January 1, Labor Code 515(b)(1). IWC to Adopt New Wage Orders. The IWC is directed to adopt new Wage Orders at a public hearing prior to July 1, 2000 without convening wage boards. The new wage orders are to incorporate the provisions of AB 60, and to include further regulation by the IWC with respect to the procedures for implementing alternative work week schedules. Labor Code 517(a). IWC to Review Wages, Hours and Working Conditions. The IWC is directed to conduct a review, prior to July 1, 2000, of wages, hours and working conditions in the following industries and occupations: (1) ski industry, commercial fishing industry, health care industry and stable employees in the horseracing industry (Labor Code 517(b); (3) licensed pharmacists (Labor Code 517(c); (3) outside salespersons. Labor Code 517(d). The IWC is authorized to issue regulate in these areas without convening wage boards. IWC to Regulate Industries and Occupations Not Previously Covered. The on-site construction, mining, logging and off-site drilling industries
7 are now subject to the Labor Code s overtime requirements. The IWC is required to review labor conditions in these industries for the purpose of promulgating wage orders. Labor Code 517(a). _ Penalties. In addition to backpay, civil penalties are established for failure to pay overtime: for an initial violation, $50 per employee for each pay period the employee was underpaid; for each subsequent violation, $100 per employee for each pay period the employee was underpaid. The DLSE is empowered to issue citations for civil penalties. B. The IWC s Implementation of AB 60. The IWC, which had been defunded by the legislature after it eliminated daily overtime from five Wage Orders, was reconstituted after the passage of AB 60 to carry out its mandates. New members have been appointed by Governor Davis. The employer representatives are William E. Dombrowski, president of the California Retailers Association, and Leslee A. Coleman, Director of Worldwide Government and Community Relations of Solectron. The labor representatives are Charles H. Center of the Laborers Union, and Barry Broad, formerly legislative advocate for the Teamsters Union. The fifth member who represents the general public is Douglas Bosco. Since January 1, 2000, the IWC has been actively engaged in regulatory activities. It has been holding public hearings and taking testimony from representatives of business, labor and employees on a variety of issues arising under AB 60. On January 28, 2000 the IWC issued an Interim Wage Order which became effective on March 1, The Interim Wage Order applies to all industries and occupations regulated by Wage Orders 1, 4, 5, 7, and 9, and it will remain in effect until new wage orders are issued. A copy of the Interim Wage Order and Statement of its Basis are included in your ICC conference materials. On March 1, 2000 the IWC issued a Notice of Public Hearing of the IWC on March 31, 2000, in Sacramento, for the purpose of considering modifications to the Wage Orders addressing, among other things, outside salespersons, the duties test for executive, administrative and professional employees, and possible new exemptions. These proposals are discussed below. II. The Effect of AB 60 on the Major Overtime Exemptions. A. The White Collar Exemptions. Labor Code 515(a) imposes three analytically distinct requirements for exemption of persons employed in executive, administrative or professional capacities: (1) the employee must be paid a salary; and (3) the employee s salary must be equivalent to no less than two times the state minimum wage for full-time employment; and (3) the employee must be primarily engaged in duties that meet the test of the exemption. 1. Salary Requirement. AB 60 incorporates into California law the long-standing federal requirement that
8 exempt managerial, administrative and professional employees must be paid a salary. The salary requirement replaces the remuneration requirements previously contained in the Wage Orders. AB 60 does not define the term salary. However, the requirement to compensate an exempt employee on a salary basis has long been part of the federal white collar exemptions, and the concept is defined by federal regulation, 29 C.F.R Section It is not clear whether the legislature intended for the federal definition and its associated requirements to apply for purposes of California law. As currently defined under federal law, the concept of salaried generally means that an employee must receive a fixed, minimum salary for any week in which he performs any work without reduction because of variations in the quality or quantity of work performed. While a detailed discussion of the federal salary basis test is beyond the scope of this paper, important requirements include the following: (a) no reduction of compensation for absences of less than one day for personal reasons, illness or injury; (b) no reduction from weekly pay for military or jury duty in any week that work is performed; and (c) no reduction for disciplinary suspensions, except for violation of safety rules of major significance./ The adoption of a salary requirement has exacerbated an existing conflict between California law and federal law with respect to computer professionals. Under the FLSA, certain computer professionals who are paid a minimum of six and one-half times the federal minimum wage are eligible for an overtime exemption even though they are not paid on a salary basis. This exemption has not been available in California, but some hourly paid computer professionals have been able to qualify for the administrative or executive exemption based on their duties as long as they satisfied the minimum remuneration requirement of $1,150 per month. With the imposition of a salary requirement, a California white collar exemption will no longer be available to any employees compensated on an hourly basis. On February 25, 2000, the IWC approved the creation of a wage board to examine an exemption for computer professionals. (See infra at page 15.) 2. Minimum Salary Level. Based on the current minimum wage of $5.75, the employee s salary must equate to $ per month. Exempt employees may be paid on a weekly, biweekly, semimonthly or monthly basis as long as the minimum salary is met. Several business groups including the California Chamber of commerce have expressed concerns that this requirement will adversely affect part-time employees. The IWC has been asked to include language in the Wage Orders allowing for the minimum salary to be prorated in relation to the percentage of part-time employment. The Chief Counsel of the DLSE has opined in his December 23, 1999 letter (included with these conference materials) that proration would conflict with the statutory language which requires payment of a salary equivalent to twice the minimum wage for full-time employment. To date, the IWC has not indicated that it would approve any proration of
9 the minimum salary. Exemption. 3. Primarily Engaged In Duties that Meet the Test of the The third requirement for exemption as a white collar employee is that the employee must be primarily engaged in duties that meet the test of the exemption. The term primarily engaged in is defined to mean more than 50% of the employee s working time. Labor Code 515(a)(e). However, the exempt duties that must comprise the majority of the exempt employee s time are not specifically defined. Labor Code 515(a) mandates that the IWC conduct a review of the duties that meet the test of the exemption and that any hearing on that issue be conducted prior to July 1, The Interim Wage Order incorporates these requirements as follows: Sections 4, 5, 7, 8, 9, of this Order shall not apply to persons employed in administrative, executive, or professional capacities. However, no person shall be considered to be employed in an administrative, executive, or professional capacity unless the person is primarily engaged in the duties which meet the test of the exemption and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Labor Code s 515(a) mandates that the Commission conducts a review of the duties which meet the test of the exemption and that any hearing conducted pursuant to that subsection be conducted no later than July 1, Until further order of the Commission, the duties which meet the tests of the exemption as one of the following set of conditions: (A) The employee is engaged in work which is primarily intellectual, managerial or creative, and which requires exercise of discretion and independent judgment, or (B) The employee is licensed or certified by the State of California and is engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting, or is engaged in an occupation commonly recognized as a learned or artistic profession; provided, however, that pharmacists employed to engage in the practice of pharmacy, and registered nurses employed to engage in the practice of nursing, shall not be considered exempt professional employees, nor shall they be considered exempt from coverage for the purposes of this subsection unless they individually meet the criteria established for exemption as executive or administrative employees. (C) For purposes of this section, Full-time employment means
10 employment in which an employee is employed for forty (40) hours per week. (D) For purposes of this section, primarily means more than one-half (1/2) of the employee s work time. a. Primarily Engaged In. As noted above, Labor Code 515(a) defines the term primarily to mean that over 50% of the employee s working time is spent on exempt duties. The inclusion of this requirement does not represent a change in the law. It has been included by the IWC in each of the Wage Orders since / The meaning of the requirement to be primarily engaged in exempt duties was recently examined by the California Supreme Court in the context of the outside sales exemption. Ramirez v. Yosemite Water Co., 20 Cal. 4th 785 (1999). The Court described California s test for the exemption as a quantitative standard and noted its distinction from the qualitative standard used for purposes of the Fair Labor Standards Act./ Under the qualitative standard used to define the white collar exemptions under the FLSA, an overtime exemption is available if an employee s primary duty meets the test of the exemption (executive, administrative or professional), and the work requires the exercise of discretion and independent judgment. In determining an employee s primary duty, federal law permits consideration of factors other than time spent, such as the relative importance of the exempt duties, the frequency of the employee s exercise of discretionary powers, and the employee s relative freedom from supervision. 29 C.F.R. Sections , (b). In contrast, under California s now-codified quantitative test the determination of whether an employee is primarily engaged in exempt work turns solely on the amount time spent on duties classified exempt as compared to duties classified non-exempt. As traditionally interpreted by the IWC and the Division of Labor Standards Enforcement, the California exemption analysis requires an examination of each of the tasks actually performed by the employee during the course of a work week for the purpose of determining whether each task is exempt or non-exempt work. All time, no matter how brief, must be classified in this manner. An employee who is found to have spent too much time (50% or more) engaged in non-exempt work does not qualify for an exemption. The quantitative approach has resulted in a definitional problem when employees perform more than one duty simultaneously. The DLSE has taken the position that an employee cannot be engaged in exempt and non-exempt work at the same time. For example, a retail manager in charge of a store who spends time waiting on customers or stocking shelves may or not be primarily engaged in exempt work at that time depending on whether the physical activities are considered dominant or incidental to the overall nature of the work. If while performing these tasks the manager is thinking about
11 managerial concerns, such as how he can cause his establishment to perform more efficiently and more profitably, how he can motivate or assist his staff, how he can resolve employee problems or complaints, and whether his inventory is proper, he may be engaged in work considered exempt. If proof of such mental activity is lacking, the physical tasks will likely be found predominant and the time will be allocated to the nonexempt category. DLSE Update, Vol. 1, No. 3 (July 3, 1993); Letter of Labor Commissioner Bradshaw dated July 6, Under established law, the employer has the burden of proof to establish the existence of an exemption. Corning Glass Works v. Brennan, 417 U.S. 188, (1974). Exemptions are narrowly construed and their application is limited to those employees plainly and unmistakably within their terms. Dalheim v. KDFW-TV, 918 F.2d 1220, 1224 (5th Cir. 1990); Nordquist v. McGraw-Hill Broadcasting Co., 32 Cal.App.4th 555, 562 (1995). Mere titles or statements of duties and responsibilities contained in written job descriptions are not determinative; the exemption turns on what the employee is actually doing with his/her time. The foregoing example illustrates the difficulties employers face when they are called upon to defend an employee s exempt classification. Employees who are placed in charge of stores, departments or business units typically are not closely supervised. Beyond instructing employees as to their basic responsibilities, employers may have difficulty identifying how employees allocate their time, and whether they are engaging in too much rank and file work, particularly where the next level of supervision is not regularly present at the same work site. b. Exempt Duties. The sparse language traditionally used in the Wage Orders to define the duties that meet the test of the exemption provide little guidance to employers or employees. For executive and administrative employees, the Wage Orders state that the work must be primarily intellectual, managerial or creative and must require the exercise of discretion and independent judgment. These terms are not further defined and there is no articulated basis for distinguishing between exempt executive and administrative employees. The professional exemption is defined in all but 5 Wage Orders to refer to state licensed or certified individuals practicing in a one of the specifically enumerated professions. Wage Orders 1, 4, 5, 9, and 10 have been broadened to include persons working in learned or artistic occupations. Over the years the duties requirement for the white collar exemption has been interpreted and applied by the Division of Labor Standards Enforcement (the agency that enforces California labor standards through the offices of the Labor Commissioner) in its opinion letters, policy statements and decisions. As interpreted by the DLSE, an exempt executive employee is one who meets all of the following requirements: (1) primary duty
12 is management of the enterprise or a department or subdivision; (2) customarily and regularly supervises two or more employees; (3) has the authority to hire and fire or to make effective recommendations regarding same; (4) customarily and regularly exercises discretionary power as defined; (5) devotes less than 50% of work time to activities not directly or closely related to the above. An exempt administrative employee is one who satisfies all of the following requirements: (1) customarily and regularly exercises discretion and independent judgment in the performance of office or non-manual work directly related to management policies or the general business operations of the employer or its customers; and (2) regularly or directly assist a proprietor or an exempt administrator, or performs work along specialized or technical lines requiring special training, experience or knowledge, or executes special assignments only under general supervision; and (3) devotes more than 50% of work time to the above activities. Attached as appendices to these materials are annotated checklists for each of the white collar exemptions. The requirements and annotations reflect the current interpretation of the duties tests as applied by the DLSE in its proceedings. However, the duties test is undergoing review and appears likely to change. In accordance with the mandate of AB 60 contained in Labor Code 515(a), the IWC is presently undertaking a review of the duties that meet the test of the exemption. 4. Proposal to Clarify the Duties Test for the Executive Exemption. On March 1, 2000, issued a proposed modification to the Wage Orders that would define the duties test for the executive exemption as follows: Managerial work is any type of work, whether mental or physical, that is performed for the purpose of, or in connection with, directing, supervising and monitoring business operations, evaluating business performance, or handling customer relations. Examples of duties that constitute managerial work include, without limitation: Interviewing, selecting and training employees; setting and adjusting pay rates and work hours; directing and monitoring the work of subordinates; demonstrating for the benefit of subordinates how to perform service and production tasks; keeping production records of subordinates for use in supervision; evaluating employees performance, efficiency and productivity; resolving employees complaints and grievances; counseling and disciplining employees; planning the work; deciding on types of materials, supplies, machinery and tools to be used or merchandise to be bought, stocked, and sold; controlling the floor and distributing of merchandise, materials, goods and supplies; providing for the safety
13 of customers, employees and property; resolving customer complaints; ensuring customer satisfaction; and performing emergency maintenance or repairs. The time devoted by an employee to those and any other managerial duties is exempt time for purposes of determining whether that employee is primarily engaged in managerial work even if that employee is simultaneously performing other tasks, such as production work, that might be characterized as exempt. An employee who is in charge of an independent or physically separate branch establishment, department or business unit shall be presumed to be primarily engaged in managerial work for purposes of the overtime exemption under this Section. If adopted by the IWC, this proposal will replace the vague language in the Wage Orders with a clearer definition of the requirements to satisfy the executive exemption. The proposal recognizes that tasks traditionally performed by managers for a managerial purpose, and tasks directly connected thereto, should be counted as managerial. It defines managerial duties in a manner that is reasonable and consistent with customary business practices. The examples of duties considered exempt are drawn from the case law and DLSE policy manual and should not be controversial. Moreover, the proposal addresses some of the difficult real world issues that have arisen under the duties test. It recognizes that the purpose for which a task is performed may determine its managerial character. For example, performing the same work as a subordinate is managerial if it is done for the purpose of training, correcting the work or motivating subordinates. On the other hand, performance of the same work as subordinates without such a managerial purpose would be considered non-exempt time. It also provides that the time a person spends simultaneously performing management tasks and other tasks that might be characterized as non-exempt should be counted as exempt time. And it recognizes a presumption of exemption for a person in charge of an independent establishment, department or business unit, similar to the federal exemption. B. Outside Sales Exemption. Labor Code Section 1171 exempts any individual employed as an outside salesperson from IWC coverage. The term outside salesperson has been defined by the IWC to mean any person, 18 years of age and over, who customarily and regularly works more than half the working time away from the employer s place of business selling tangible or intangible items or obtaining orders or contracts for products, services, or use of facilities. Title 8, Cal. Code Regs. Section 11040, paragraph 2(J). Like the white collar exemptions, the California outside sales exemption is narrower than its counterpart under the Fair Labor Standards Act. The IWC utilizes the quantitative approach for the outside sales exemption that focuses exclusively on
14 whether the employee spends more than half of his/her working time engaged in sales work away from the employer s place of business. Time spent performing any work at the employer s place of business, even if it is sales work, currently counts against the exemption. The employer s place of business is broadly construed to include any fixed site used as a headquarters or base for telephone solicitations, i.e., including the employee s home. Similarly, any work other than selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities counts against the exemption, even if such other work is performed away from the employer s place of business and even if it is incidental to sales work. In contrast, the federal exemption focuses on defining the employee s primary function. Moreover, while the federal exemption does place a 20 percent cap on non-exempt (non-sales) work, that cap does not apply to any non-sales activities that are incidental to outside sales, including, for example, making of deliveries, 29 C.F.R. Section In Ramirez v. Yosemite Water Co., 20 Cal.4th 785 (1999), the California Supreme Court found that the IWC had the authority to promulgate a stricter standard, and that such greater protection is explicitly permitted by the FLSA s savings clause. The Ramirez case addressed the exempt status of route sales representatives whose duties included a mixture of sales and delivery work. The court concluded that the lower court erred in applying the exemption because it had impermissibly relied on federal regulations to conclude that the route salesmen s primary function was sales without regard to how much time they spent selling as opposed to making deliveries and engaging in other nonsales functions. The court also elaborated on the manner in which travel time or other activities incidental to sales and non-sales work must be treated. The court said that for purposes of the California exemption, travel time that is directly associated with sales would be properly treated as exempt work, while travel time associated with deliveries and other non-exempt functions would not. Where travel occurs for both purposes, it must be apportioned between sales and non-sales activities for purposes of determining whether the 50% test is met. Id. at 801. Attached as an appendix to these materials is a outside sales checklist reflecting current requirements for the exemption according to the IWC s current guidelines. On March 1, 2000 the IWC announced a proposed modification to every wage order addressing the outside sales exemption. The proposal states: Outside Salesperson means any person, 18 years of age or over, who customarily and regularly works more than half the working time away from the employer s place of business, who is paid on a salary or commission basis, and who is primarily engaged in sales related duties such as selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities. Delivery related duties such as loading and unloading of motor vehicles, driving to and from locations, stocking shelves,
15 refilling orders for preset volumes of products or services, arranging and cleaning displays, and removing empty containers shall not be considered sales related duties within the meaning of this definition. If adopted by the IWC this proposal will: _ Add a new requirement that outside salespersons must be paid on a salary or commission basis. _ Explicitly permit sales related duties to be counted in determining whether the employee is primarily engaged in sales. This would include travel and other activities incidental to sales that are performed outside the employer s place of business. It also appears that inside sales and other inside work that is done directly in conjunction with and incidental to outside sales and solicitations could be counted in determining whether this requirement is met. Exclude specified delivery related activities from the definition of sales related work. Accordingly, such activities cannot be counted in determining whether an employee is primarily engaged in sales work. The exclusion of delivery related work is apparently based on the Supreme Court s analysis in Ramirez. However, the revised wording appears to allow delivery related activities to be counted for purposes of satisfying the requirement to work more than half of the working time away from the employer s place of business. This may result in somewhat broader application than the previous exemption construed in Ramirez. C. Other Widely Available Overtime Exemptions./ 1. Commissioned Employees. An overtime pay exemption exists for certain commissioned employees covered by Wage Order 4 (which applies to professional, technical, clerical, mechanical and similar occupations) and Wage Order 7 (which applies to employees in the mercantile industry). The California exemption applies if an employee s earnings exceed one and one-half times the state minimum wage and more than half of the employee s compensation represents commissions. California s commission exemption is significantly different in scope than the federal exemption for commissioned employees found in Section 7(i) of the Fair Labor Standards Act. The federal exemption is limited to employees of retail and service establishments and in this sense is narrower than the California exemption which applies to all employers covered by Wage Orders 4 and 7. On the other hand, the California exemption is limited to employees who are primarily engaged in sales and whose compensation is based on a percentage of a sale of a product or service. Compensation that is based on the number of products, appointments, or procedures completed is considered a piece rate, not a commission. For example, the commission exemption was
16 found inapplicable to mechanics who were paid a percentage based on services they performed but were not involved in making sales. Keyes Motors v. Div. of Labor Standards, 197 Cal.App.3d 873 (1987). See also Ramirez v. Yosemite Water Co., supra, 20 Cal.4th 785 (1999) where the Supreme Court reversed and remanded the appeal court s determination that route water salesmen were exempt under the commission exemption. The court held that the application of the commission exemption turned on whether the employees were found to be primarily engaged in sales or non-sales activities. 2. Unionized Employees. The Wage orders traditionally have exempted employees covered by a collective bargaining agreement if the agreement provides premium wage rates for overtime work and a wage rate of not less than $1.00 per hour more than the state minimum wage. AB 60 modified this exemption. The Interim Wage Order incorporates the revision and provides that employees working under valid collective bargaining agreements are exempt from the AB 60 overtime provisions if the agreement provides for wages, hours of work, and working conditions of the employees, premium wage rates are designated for all overtime hours worked and the regular hourly rate of pay is at least thirty percent more than the state minimum wage. In its Statement of Basis for the Interim Wage Order, the IWC cited testimony submitted from the California Labor Federation urging that the parties to a collective bargaining agreement should be permitted to define what constitutes overtime hours and to determine the rate of premium pay to be paid. The IWC agreed with this contention, stating so long as the collective bargaining agreement establishes regular and overtime hours within the work week, establishes premium pay for all such hours worked, and the regular rate of pay is more than thirty percent above the minimum wage, then the exemption is applicable. D. Possible New Exemptions. AB 60 authorized the IWC to adopt new exemptions not inconsistent with the Labor Code. The IWC s authority to take such action sunsets on July 1, Several proposals are under review by the IWC at the present time. 1. Computer Professionals. On February 25, 2000, the IWC announced that it was going to create a wage board composed of employer and employee representatives to investigate and consider how to address complaints from the technology industry about the impact of AB 60 on compensation of computer professionals who earn an hourly wage and are exempt from overtime under the Fair Labor Standards Act. At the IWC s February 25, 2000 public hearing, representatives from consulting companies that employ many hourly computer specialists warned that AB 60 could lead to a huge windfall for highly compensated computer specialists who may be required to work long hours on a given project before taking a break to work on the next project. The industry is advocating for the establishment of an exemption paralleling federal law. As of the date of this paper, no proposals had been issued by the IWC for public comment.
17 2. Highly Compensated Employees Earning Incentive Compensation. On March 1, 2000 the IWC issued for consideration and public comment the issue of whether to create a partial overtime exemption for employees who receive a base wage that is higher than the current minimum wage, together with additional compensation in the form of incentive bonuses or stock options. The following exemption has been proposed: The obligation to pay overtime after 8 hours in a day shall not apply to any employee during that period of time that is used to determine the employee s eligibility to receive additional compensation for service or performance, if the employee receives a base income or hourly wage that is equal to or greater than 2.5 times the state s current minimum wage for full-time employment. Any work in excess of 12 hours in one day shall be compensated at the rate of no less than twice the regular rate of pay for an employee. Any work in excess of 8 hours on the 7th consecutive day of work within the same workweek shall be compensated at the rate of no less than twice the regular rate of pay for an employee. The payment of overtime is applied to all work beyond 40 hours in a work week, consistent with the Fair Labor Standards Act. Additional compensation includes discretionary and non-discretionary sums paid in addition to an employee s regular hourly rate which is tied to the financial success of the company or employee performance. These sums may include: stock options, profit sharing plans, bonuses or variable pay, any of which are based on company success or employee performance. Additional compensation does not include payments that are part of an employee s base wage. In order to qualify as additional compensation, at least half of the employees who potentially qualify for additional compensation under the terms of the plan must receive such compensation in accordance with the terms of the plan The IWC will hear testimony on this proposal at its public hearing on March 31, III. Conclusion. AB 60 made several important, substantive changes in California overtime laws, most notably the restoration of the daily overtime premium. But these changes are
18 limited by comparison with the broad mandate given to the IWC. In the context of clarifying the duties test and considering new exemptions, the IWC will be making important policy decisions that will significantly affect the compensation programs of employees who have entrepreneurial responsibilities, or who work in highly skilled technical jobs, or who are incentivized with stock options and performance bonuses. The business community should watch for developments in these areas in the near future.
19 EXECUTIVE EXEMPTION CHECKLIST 1. Employee is paid on a salary basis; and 2. Employee s minimum salary is not less than twice the minimum wage; If no to 1 and 2_employee is not exempt. If yes to 1 and 2 _ go on to Employee s primary duty is management of the enterprise or of a customarily recognized department or subdivision; If no _ employee is not exempt. If yes to 3 _ go on to Employee customarily and regularly directs the work of at least two or more other employees therein; If no_employee is not exempt. If yes to 4 _ go on to Employee has the authority to hire and fire, or to command particularly serious attention to her or her recommendations on such actions affecting employees; If no _ employee is not exempt. If yes to 5 _ go on to Employee customarily and regularly exercises discretionary powers; If no _ employee is not exempt. If yes to 6 _ go on to Employee spends more than than 50% of his/her work time engaged in managerial work as defined above. If no _ employee is not exempt. If yes _ employee is an exempt executive employee.
20 PROFESSIONAL EXEMPTION CHECKLIST Wage Orders 2, 3, 6, 7, 8, 11, 12, 13, 15 To qualify for exemption as a professional employee, the worker must, as a rule, be shown to comply with all of the following requirements:1. Employee is paid on a salary basis; and 2. Employee s minimum salary is not less than twice the minimum wage; If no to either 1 or 2 _ employee is not exempt. If yes to 1 and 2 _ go on to Employee is licensed or certified by the State of California and is engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting; If no employee is not exempt. If yes _ go on to Employee spends more than 50% of his/her working time engaged in professional work as defined above; If no _ employee is not exempt. If yes _ employee is an exempt professional employee.